Passing Along the Family Business

Small businesses tend to follow a generational pattern. That is, a highly motivated individual who has a lot of good sense and initiative starts the business. They build it up, and perhaps involve other family members, such as their spouse, siblings and children, which may become part owners of the business.

Not all businesses stay afloat for the entire working life of the founder. But if they do, the founder commonly wants the enterprise to continue in a healthy state and would also like to share some of the proceeds with the family.

Unfortunately, this simple aim is much more difficult to achieve than you might think. Only about 30 percent of businesses are passed on to the second generation, and only about 15 percent make it to the third.

Businesses fall apart or are taken over by outsiders for many reasons. It may be difficult to get good, cohesive management out of a family group, where some members are only marginally concerned with the business. Poor communication within a family can lead to destructive infighting. And tax laws in some countries can have a savage impact when an owner dies. Passing on a business comes under the general heading of ‘succession planning’. Where succession planning is successful, a business owner may be able to retire with a secure source of income and see successors continue to run the family business well. Family conflicts will be minimized and the tax demands on the business will not threaten its existence.

Succession planning is a process. It needs to begin long before family members find themselves in a crisis meeting, saying something like, ‘Okay, Bob can’t continue to run the business with his heart problem. Who wants to volunteer?‘

A smooth transition must be organized well in advance. For one thing, the successor must be groomed and given the skills that will enable them to be a good CEO. And family issues such as rivalry and jealousy need to be addressed in a calm and deliberate way, and a resolution found that will be acceptable to everybody. It will be extremely difficult to come to such a resolution when a business is in a crisis and family members are dealing with deep grief.

Succession planning also needs to be handled in a way that will benefit the business. For example, it may not be a bad idea to bring outsiders onto the board of a family business. They may bring crucial expertise. It may be better if some members of the family stay at arm’s length and surrender voting rights. Because good business decisions need to be well informed, and not all family members will have time to do their homework.

Forward planning can give family members a fair assessment of how much time they should invest in a business, given their likely long-term rewards. This will minimize the chance of bitterness and recriminations when ownership and power is transferred. But the key thing about succession planning is that it involves highly complex legal and accounting issues. Professional help should be sought at an early stage and a full range of options should be talked through.

Copyright 2003, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com